Question

Assume that you own an investment that will pay you $15,000 per year for 12 years, with the first payment today. You need money today to start a new business, and your uncle offers to give you $120,000 for the investment. If you sell it, what rate of return would your uncle earn on the annuity?

A. 8.41%
B. 7.99 %
C. 7.12 %
D. 7.59% Stm

Answer 1

To calculate the rate of return, we need to compare the amount your uncle is paying to the present value of the annuity. The rate of return would be approximately 7.12%.

Step-by-step explanation:

To calculate the rate of return, we need to compare the amount your uncle is paying to the present value of the annuity. The present value can be calculated using the formula: PV = PMT * ((1 - (1 + r)^-n)/r), where PV is the present value, PMT is the payment received each year, r is the rate of return, and n is the number of years. Plugging in the given values, we get:

PV = $15,000 * ((1 - (1 + r)^-12)/r) = $120,000

This equation can be solved to find the rate of return, which is approximately 7.12%.